How normal monsoon could impact agriculture, inflation, income & storage

Last week, the Indian Meteorological Department (IMD) released its first annual monsoon forecast for June-September. Monsoons are likely to be normal with the probability of deficient or excessive monsoons being relatively low, according to IMD. If this prediction comes true, what does this really mean for India's economy?

Impact on agricultural output:

The first and most important impact is, of course, on agricultural production, especially in the kharif or summer season. "This is because about 55% of cropped area is dependent on monsoon rains and does not have irrigation support," says Chetan Ahya, MD, Morgan Stanley Research.

While the impact on summer crops may be more direct, there is also an indirect impact on rabi (winter) crops like wheat and oilseeds. "Rainfall during June-September season impacts ground water and reservoir levels and is also critical for irrigation of rabi crops," says Ramesh Chand, director, National Centre for Agricultural Economics and Policy (NCAP).

Variations across time and space:

However, the impact of rainfall on agricultural production also varies depending on how rainfall is distributed across states and the distribution over the months. For instance, despite good monsoons in 2011-12, production of oilseeds, pulses and coarse cereals was low as the spread of rainfall in the western belt was affected, points out Ashok Gulati, chairman, Commission for Agricultural Costs and Prices (CACP).

"To assess the impact of monsoons on crop output, one has to look at rainfall in each zone and the cropping pattern there," he adds. The great drought of 2009 points to another case where food grain production actually marginally increased compared to the 2003 drought when food grain production declined by 17%.

This was because the 2009 drought was concentrated in areas around Punjab and western UP and crop output here wasn't as affected as these are heavily irrigated regions. There could also be below normal rainfall in the initial months of the season followed by above normal monsoons in the last two months. A delayed monsoon may lead to delayed sowing, thereby impacting yields.

Impact on inflation:

With agriculture contributing to 17% of India's GDP and providing employment to 58% of the population, any impact of monsoons on agricultural growth would feed into prices, incomes and GDP growth. Food inflation was already around 10% in March.

A recent Barclays report by Siddhartha Sanyal says that "apart from one spike in January 2011 (mainly due to vegetable prices), normal rainfall tends to have a moderating effect on agriculture prices". The report also says that due to two largely regular monsoon seasons in the past two years, certain agriculture products like cereal and cotton have seen relatively lower inflation after the 2009 drought.

According to assessments of crop production released by the agriculture ministry earlier this year, India is estimated to have witnessed a record production of rice, wheat and cotton in 2011-12 and experts say a favourable monsoon in 2012 would ensure that the prices of these would remain stable or go down.

But a normal monsoon is not the only factor. "Food inflation is due to articles like vegetable, fruits and milk which depend on the demand side of the economy and monsoons have a much lower impact on these," says YK Alagh, an agriculture expert. And government policy plays a big part too. If the government accepts the CACP recommendations of an increase in the minimum price to be paid to farmers, prices could be pushed higher as well.

Impact on income:

Economists say the relationship between monsoons and rural incomes is tenuous at best and the impact on income varies from crop to crop. For instance according to NCAP's Chand, in years of good monsoons, farmers tend to shift towards production of high-income crops like rice and wheat from low-income crops like coarse cereals so there is definitely some income effect.

And a good monsoon, translated into higher agricultural and rural incomes would potentially keep consumer spending robust. For instance, according to sources in Hyderabad, even in a small taluk HQ in a backward mandal, dealers in John Deere equipment expect sales to pick up if the monsoons are good.

But an overproduction of crops can lead to a glut in prices like in the case of potatoes last year. Also, costs of production have been growing at around 15% p.a. For instance, fertiliser costs have doubled in 2011-12 and labour costs have gone up by 75% in the past three years so even if normal monsoons and higher minimum support prices lead to higher farm incomes, the profit margins needn't be dramatically higher, points out Gulati. So for now the impact on income and consumption are a conjecture at best.

Impact on storage:

With already record production of food grain estimated last year, normal monsoons could put further pressure on storage, especially of food grain. "Storage is already in a crisis situation. By June 1, 2012, there will be 75 million tonnes of food grain stocks while the total storage capacity is less than 50 million. The rest are more or less exposed to rain damage," says Gulati.